As the week progressed, the selling pressure intensified as investors reacted to a new forecast calling for warmer temperatures in key demand areas. Long speculators took profits and headed to the sidelines as the weather news outweighed government storage data that showed an unexpectedly large draw from inventories.
According to the U.S. Energy Information Administration, natural gas stockpiles fell by 147 billion cubic feet in the week-ended December 9. Analysts and traders were looking for a 130 billion cubic feet drawdown.
The decline in inventory was well-above the average withdrawal of 79 billion cubic feet for that week on a historical basis. Current inventories are now 1.3 percent below last year’s level. It was only a month ago that inventories stood at a record high.
Next week’s inventories should drop even further since they will incorporate this week’s high demand due to the extremely cold temperatures in the Midwest in high usage areas like Chicago. However, traders are likely to treat this data as “old news” because they are looking at the weather at least two weeks out.
Although the longstanding supply glut is expected to be reduced further during the upcoming weeks, traders are more focused on new forecasts calling for warmer weather. Traders are also discussing the possibility of the warmer-than-expected weather continuing into the end of the month.
The main trend is up according to the daily swing chart. The trend turned up last week when buyers took out the October 18 swing top at $3.630. However, the buying dried up at $3.703.
With the market closing on its high for the week and momentum pointing up, the chart pattern suggested an easy follow-through move to the upside, but this was not to be as the market opened sharply lower December 12. This was proof that traders were not watching the extremely frigid weather for the upcoming week, but rather the weather about two weeks out.
The main range was formed by the top from the week-ending June 20, 2014 at $4.606 to the bottom from the week-ending February 26, 2016 at $2.468. Its retracement zone is $3.537 to $3.789.
This zone is controlling the longer-term direction of the natural gas market since it stopped the rally in October and last week.
The zone is so important that we can say with confidence that we expect a bull market to extend on a sustained move over $3.789 and for weakness to develop on a sustained move under $3.537.
If buyers can overcome the Fibonacci level at $3.789 with conviction on better-than-average volume and a bullish weather pattern behind it, then the market will have a clear shot at trading as high as $4.382 before the winter ends.
This week’s close under the main 50 percent level at $3.537 indicates the presence of sellers. The market is likely to continue lower if the warm weather into the end of the year continues to be forecast.
Given the short-term range of $2.764 to $3.703, the next potential downside target is its retracement zone at $3.234 to $3.123.
This zone is a value zone so buyers will likely show up on a test of this zone. Don’t give up on the long side just because the market is in the midst of a correction. The price action is orderly as well as the trade. Buyers and sellers are clearly following the weather pattern and with the official start of winter next week, we can easily see a return of cold weather.
Ideally, we’d like to see a frigid arctic blast re-emerge when natural gas is trading inside $3.233 to $3.123. This zone is our primary downside target over the near-term.
The way I see this market. If we get extremely cold temperatures this winter, we are either going to be looking to buy the break into $3.233 to $3.123 or strength over $3.685 and $3.902. Hopefully, we’ll get a chance on this current correction.